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Derivative Financial Instruments
 9 Months Ended
Oct. 05, 2013
Derivative Financial Instruments

7. DERIVATIVE FINANCIAL INSTRUMENTS

The company measures the fair value of its derivative portfolio by using the price that would be received to sell an asset or paid to transfer a liability in the principal market for that asset or liability. These measurements are classified into a hierarchy by the inputs used to perform the fair value calculation as follows:

Level 1: Fair value based on unadjusted quoted prices for identical assets or liabilities in active markets

Level 2: Modeled fair value with model inputs that are all observable market values

Level 3: Modeled fair value with at least one model input that is not an observable market value

COMMODITY PRICE RISK

The company enters into commodity derivatives designated as cash-flow hedges of existing or future exposure to changes in various raw material prices. The positions held in the portfolio effectively fix the price, or limit increases in price, for various periods of time extending as far as fiscal 2016. The company’s primary raw materials are flour, sweeteners and shortening, along with pulp, paper and petroleum-based packaging products. Natural gas, which is used as oven fuel, is also an important commodity input to production.

As of October 5, 2013, the company’s hedge portfolio contained commodity derivatives with a net fair value of $(4.4) million, which is recorded in the following accounts with fair values measured as indicated (amounts in millions):

 

     Level 1      Level 2      Level 3      Total  

Assets:

            

Other long-term

    $ 0.1       $ —        $ —        $ 0.1   
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 0.1       $ —        $ —        $ 0.1   
  

 

 

     

 

 

     

 

 

     

 

 

  

 

     Level 1     Level 2     Level 3      Total  

Liabilities:

          

Other current

    $ (2.6 )    $ (0.9 )    $ —        $ (3.5 ) 

Other long-term

      (0.3 )      (0.7 )      —          (1.0 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Total

      (2.9 )      (1.6 )      —          (4.5 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

Net Fair Value

    $ (2.8 )    $ (1.6 )    $ —        $ (4.4 ) 
  

 

 

    

 

 

    

 

 

     

 

 

  

The effective portion of changes in fair value for these derivatives is recorded each period in other comprehensive income (loss), and any ineffective portion of the change in fair value is recorded to current period earnings in selling, marketing and administrative expenses. All of the company-held commodity derivatives at October 5, 2013 and December 29, 2012 qualified for hedge accounting.

INTEREST RATE RISK

The company entered into a treasury rate lock on March 28, 2012 to fix the interest rate for the notes. The derivative position was closed when the debt was priced on March 29, 2012 with a cash settlement that offset changes in the benchmark treasury rate between the execution of the treasury rate lock and the debt pricing date. This treasury rate lock was designated as a cash flow hedge and the cash settlement was $3.1 million and will be amortized to interest expense over the term of the notes.

The company entered into interest rate swaps with notional amounts of $85.0 million, and $65.0 million, respectively, to fix the interest rate on the $150.0 million term loan secured on August 1, 2008 to fund the acquisitions of ButterKrust Bakery and Holsum Bakery, Inc.

The interest rate swap agreements result in the company paying or receiving the difference between the fixed and floating rates at specified intervals calculated based on the notional amount. The interest rate differential to be paid or received will be recorded as interest expense. These swap transactions are designated as cash-flow hedges. Accordingly, the effective portion of changes in the fair value of the swaps is recorded each period in other comprehensive income. Any ineffective portions of changes in fair value are recorded to current period earnings in selling, distribution and administrative expenses.

The company has the following derivative instruments located on the consolidated balance sheet, which are utilized for the risk management purposes detailed above (amounts in thousands):

 

   

Derivative Assets

    

Derivative Liabilities

  
   

October 5, 2013

    

December 29, 2012

    

October 5, 2013

    

December 29, 2012

  

Derivatives designated as hedging instruments

  

Balance

Sheet

location

   Fair
Value		    

Balance

Sheet

location

   Fair
Value		    

Balance

Sheet

location

   Fair
Value		    

Balance

Sheet

location

   Fair
Value		  

Interest rate contracts

   —     $ —       —     $ —      

Other current liabilities

   $ —      

Other current liabilities

   $ 867   

Interest rate contracts

   —       —       —       —      

Other long term liabilities

     —      

Other long term liabilities

     —    

Commodity contracts

  

Other current assets

     —      

Other current assets

     —      

Other current liabilities

     3,463     

Other current liabilities

     3,047   

Commodity contracts

  

Other long term assets

     58    

Other long term assets

     9     

Other long term liabilities

     917     

Other long term liabilities

     146   
   

 

 

      

 

 

      

 

 

      

 

 

  

Total

     $ 58       $ 9        $ 4,380        $ 4,060   
   

 

 

      

 

 

      

 

 

      

 

 

  

 

The company has the following derivative instruments located on the condensed consolidated statements of income, utilized for risk management purposes (amounts in thousands and net of tax):

 

Derivatives in Cash Flow Hedge
Relationships

   Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)
For the twelve weeks ended		    

Location of Gain or (Loss)

Reclassified from AOCI into

Income

(Effective Portion)

   Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)
For the twelve weeks ended		  
  October 5, 2013     October 6, 2012       October 5, 2013     October 6, 2012  

Interest rate contracts

   $ 26      $ (23 )   

Interest (expense) income

   $ (13 )    $ (378 ) 

Commodity contracts

     (1,611 )      62     

Production costs(1)

     (5,893 )      (2,299 ) 
 

 

 

    

 

 

      

 

 

    

 

 

  

Total

   $ (1,585 )    $ 39        $ (5,906 )    $ (2,677 ) 
 

 

 

    

 

 

      

 

 

    

 

 

  

Derivatives in Cash Flow Hedge
Relationships

   Amount of Gain or (Loss)
Recognized in OCI on
Derivative (Effective Portion)
For the forty weeks ended		    

Location of Gain or (Loss)

Reclassified from AOCI into

Income

(Effective Portion)

   Amount of Gain or (Loss) Reclassified
from Accumulated OCI into Income
(Effective Portion)
For the forty weeks ended		  
  October 5, 2013     October 6, 2012       October 5, 2013     October 6, 2012  

Interest rate contracts

   $ (241 )    $ (1,606 )   

Interest (expense) income

   $ (502 )    $ (1,379 ) 

Commodity contracts

     (16,883 )      4,594     

Production costs(1)

     (13,298 )      (15,358 ) 
 

 

 

    

 

 

      

 

 

    

 

 

  

Total

   $ (17,124 )    $ 2,988        $ (13,800 )    $ (16,737 ) 
 

 

 

    

 

 

      

 

 

    

 

 

  

 

1. Included in materials, supplies, labor and other production costs (exclusive of depreciation and amortization shown separately).

The balance in accumulated other comprehensive income (loss) related to commodity price risk derivative transactions that are closed or will expire over the next five years are as follows (amounts in millions and net of tax) at October 5, 2013:

 

     Commodity
price risk
derivatives		  

Closed contracts

    $ (3.3 ) 

Expiring in 2013

      (0.1 ) 

Expiring in 2014

      (2.2 ) 

Expiring in 2015

      (0.3 ) 

Expiring in 2016

      (0.1 ) 
  

 

 

  

Total

    $ (6.0 ) 
  

 

 

  

As of October 5, 2013, the company had the following outstanding financial contracts that were entered to hedge commodity risk (amounts in millions):

 

     Notional
amount		  

Wheat contracts

    $ 110.2   

Soybean oil contracts

      23.9   

Natural gas contracts

      16.2   
  

 

 

  

Total

    $ 150.3   
  

 

 

  

The company’s derivative instruments contain no credit-risk-related contingent features at October 5, 2013. As of October 5, 2013 and December 29, 2012, the company had $8.9 million and $9.0 million, respectively, in other current assets representing collateral for hedged positions.